Wednesday, April 2, 2008

"Real" Wealth

As a native Southern Californian, I know more about real estate than any normal person should. But I've seen three boom-bust cycles in my life and lived in five different houses before I was 20. Real estate prices have always gone up over time--though I've read enough Megan McArdle to know that she thinks the prices are going to go down as the boomers move into retirement homes. (I suspect we'll open the borders pretty wide before anything like that happens.)

Those who have been around longer than I have assured me that the boom-bust recycle predates my corporeal presence.

The first time it really hit home for me was when I was looking to get out of the renting game. I was fairly young and making good money, considering my age and financial footprint. But there was nothing on the market for less than $200,000 except for a few meager condos. Out of the question. I wasn't going to pay that for an apartment that somehow fit a legal definition that allowed it to be called something else.

Well, then came the bust part of the cycle, and an earthquake, and a few years later, houses are going in the mid-to-low-100s and, and you could even get a castle with some nice land for $600K. This coincided pretty nicely with the tech bubble, allowing me to purchase a modest home at a reasonable price.

Now, the cycle always leaves prices higher than before so, just as with the stock market, if you're in it for the long haul, you can always come out ahead. A buddy of mine bought a house recently at near peak prices--just as the market was falling--and it will be years before the market returns his value but he didn't buy it as an investment, he bought it as a home. (Even so, there will be another spike that pushes the house up past what he paid for it long before it's, you know, actually worth that.)

So, watching my own house quadruple in value, something like this doesn't surprise me. In fact, I basically expect prices to drop to something higher than what I paid ten years ago. Maybe 40-50% higher. Which is still 40% of what it was going for at its height.

I have been expecting this to happen no sooner than early next year, after the next Pres takes office, barring an earthquake, but it might happen sooner. Right now I've been trying to refinance to a ridiculously low interest rate, but I'm racing against falling housing prices.

I'm guessing they'll stay bottomed out for 2-3 years. Now all I need is another tech bubble.